Liberalizing the Global Economy

The motion toward a globalized economy has had a history of fits and starts. Last month was especially strained, as commentator Dennis Henderson explains.

By Dennis Henderson

Wilmington NC – [Click the LISTEN button to hear Dennis' commentary.]

The erratic march toward a globalized economy stumbled badly last month when the world trade summit in Canc?n, Mexico was abruptly adjourned. Virtually no new agreements were reached among the 146 member countries of the World Trade Organization, or WTO. This is the multinational organization formed in the early 1990s to guide the movement of member nations toward a single global market.

The Canc?n talks continued discussions that began more than two years ago in Doha, Qatar – called the Doha round of trade negotiations. Failure at Canc?n was not a complete surprise. WTO members have, after all, failed to meet any deadline set at the beginning of the Doha round.

But, the reason for the Canc?n collapse was a surprise to many. When the summit opened, most observers felt that disagreement on agricultural issues would be its down-fall. Indeed, there is much disagreement on agriculture, particularly between the less-developed countries and the rich countries – the US, the European Union, and Japan.

The wealthiest countries spend about 300 billion dollars a year subsidizing their farmers. Because subsidies increase farm production in these countries, they impose import barriers to keep out farm products grown elsewhere. Japanese import tariffs on rice, for example, can reach as high as 10 times the world market price. The European Union, or EU, spends more on annual subsidies for each of its cows than most sub-Saharan Africans earn. In the US, the current farm bill creates more than 80 billion dollars in direct agricultural subsidies over the decade.

The less developed countries argue – with merit – that these rich-country policies discriminate against their farmers in the world marketplace. Further, that such subsidies should be scrapped as a condition of multinational trade liberalization. A block of developing countries, called the G22, was formed to press their point at Canc?n.

American negotiators showed some willingness to move toward the G22 objectives. They entered the summit by embracing free trade in all manufactured and consumer goods by 2015 and proposed to cut agricultural tariffs by 76 percent within five years. The Americans were prepared to be bold, if other countries would be also. The EU was more reticent – some Europeans are more keen on agricultural reform than others – but did appear to offer some concessions on farm products that matter to poor countries, without specifying which ones.

Thus, agriculture was not entirely a stale-mate. Rather, negotiations stalled on the Singapore issues. These were defined in 1996 when WTO met in Singapore to discuss expanding the multilateral trade agreement to include rules on foreign investment, competition policy, government purchases, and customs clearance procedures.

Some Singapore issues are straight-forward. For example, reducing the time for customs inspectors to clear imports – now as much as 11 days in India – is obviously sensible. Others are more contentious. Regarding foreign investment, as an example, many developing countries require that foreign investors have local partners. The idea being that this will increase knowledge spill-over, thus raising the host country’s stock of intellectual capital. Rich countries, who originate most foreign investment, dislike such requirements.

The EU has led support for the Singapore issues, arguing that they should be treated as a package. Others have been willing to negotiate one or two, but not all. The EU did give ground at Canc?n by suggesting that not all be discussed. Some African and Asian countries refused, which essentially brought the summit to a close.

The shame of it is, the US, for one, came to Canc?n talking a good game, particularly regarding agriculture. Of course, this might have been empty posturing. Even so, a chance for real progress was missed because others were unwilling to negotiate in good faith.

[An archive of transcripts of Dennis Henderson's commentaries can be found at whqr.org/Dennis%20Henderson/archive03.htm.]

Dennis Henderson is an economist and educator who lives in Wilmington.